Barclays' share prices fell heavily yesterday after news broke that it is being sued by New York over what is called a "dark pool" operation.

Investors were this morning waiting to see how shares in Barclays would perform after they slumped over 6.5 per cent yesterday in the wake of news that the UK-listed firm is being sued by authorities in New York. It is claimed the bank falsified marketing materials to mislead clients into investing in a "dark pool" operation.

Separately, Reuters reported today that the bank is starting an internal investigation into the matter.

The claims from New York are particularly bitter for a bank that has sought to repair its image following its role - among with those of other banks - in rigging interbank interest rates such as LIBOR.

Dark pool trading operations allow clients to trade shares while keeping prices private until the deal is completed. They have been criticised for their lack of transparency and hurting the ability of the market to accurately price securities.

New York attorney general Eric Schneiderman said in a statement that despite claims from Barclays that safeguards were in place to protect clients, the bank had operated its dark pool to favour high-frequency traders.

“The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit,” said Schneiderman.

“Barclays grew its dark pool by telling investors they were diving into safe waters. According to the lawsuit, Barclays’ dark pool was full of predators – there at Barclays’ invitation,” he added.

Yesterday, shares in the bank closed down 6.52 per cent, at 215 pence per share. The developments are a blow to the efforts of Antony Jenkins, CEO for over a year, who had taken over from Bob Diamond, the high-profile chief executive who resigned in 2012 after the LIBOR affair. Barclays has, it says, sought to tighten up on compliance controls. Barclays had, most famously, recruited former Financial Services Authority CEO Hector Sants to head compliance and regulatory efforts, but Sants subsequently resigned from the post due to health-related stress.

Late last night, Senator Carl Levin (Democrat, Michigan), commented on the affair. He has been a high-profile figure in the regulatory surge since 2008, and who recently chaired a Senate Permanent Subcommittee on Investigations hearing on conflicts of interest, loss of investor confidence and high-speed trading. He spoke about the Barclays case.

“Our recent hearing highlighted some significant conflicts of interest in our stock market, and today’s action by Attorney General Schneiderman alleges more. The behavior described in this complaint would put a bank’s financial interest in marketing its dark pool and profiting by providing access to predatory high-speed traders ahead of the interests of investors. Action is needed to end conflicts of interest in the US stock market," Levin said.

Today, Reuters reported that Jenkins told staff in an internal memo: "I will not tolerate any circumstances in which our clients are lied to or misled and any instances I discover will be dealt with severely. The success of our business depends crucially on our clients being able to rely absolutely on our honesty and integrity." 

Claims

Schneiderman alleges that Barclays falsified marketing material purporting to show the extent and type of high frequency trading in its dark pool. In one example, he said Barclays removed from a marketing document the dark pool’s then-largest participant – a high frequency trading firm Barclays knew engaged in “predatory” behaviour in the dark pool. He said that in response, one employee stated: “I had always liked the idea that we were being transparent, but happy to take liberties if we can all agree.”

According to Schneiderman, Barclays heavily promoted a service called Liquidity Profiling, which the bank claimed was a “surveillance” system that tracked every trade in its dark pool in order to identify predatory traders and hold them accountable.

Despite these promises, the attorney general alleges that Barclays has never prohibited any trader from participating in its dark pool, regardless of how predatory its activity was determined to be, and assigned safe ratings to traders that were otherwise determined to be toxic.

The complaint further alleges that Barclays operates its dark pool to favour high-frequency traders and has actively sought to attract them by giving them systematic advantages over others trading in the pool.

The statement said that the investigation was aided “significantly” by a number of former Barclays’ employees.

A spokesperson for Barclays said the bank was taking the allegations “very seriously”.

“Barclays has been cooperating with the New York Attorney General and the Securities Exchange Commission and has been examining this matter internally. The integrity of the markets is a top priority of Barclays,” the spokesperson said.

In 2012, Barclays was fined $450 million by US and UK regulators for trying to manipulate LIBOR. Last month, the UK’s Financial Conduct Authority fined Barclays $43.7 million for failings relating to gold price manipulation carried out by one of its former traders. The financial regulator said Barclays had been fined for failing to adequately manage conflicts of interest between itself and its customers between 2004 to 2013.